Monday, March 19, 2007

State Rep. Julie Hamos [D-Evanston]: Well, you know what, if they [law firms] are now charging $300/hour, they might charge their clients $303. One percent [more]. [At the time, it was thought that services would be taxed at 1% under Blagojevich's proposed GRT; it turns out that he proposed 1.8%; Also, partners at large loop law firms are generally billed out at more than $300/hour].

Jeff Berkowitz: Yeah, but they are already raising their rates [or trying to, with many large law firms raising annual salaries for first year associates from $135, 000 to $145,000]. So, now they are going to have to try to raise them more.

First, tonight's show was taped three days before the Governor’s State of the State and State of the Budget speech in which he set out his proposal in somewhat more detail. And, as everyone knows, the devil is in the details.

Second, we have since learned that Blago is not proposing [at least so far] a reduction in the state portion of the sales tax--as a partial offset to his broader base for his gross receipts tax [most services are included].

Third, there is a pyramiding effect to his tax, i.e., intermediate steps in the production process are taxed all along the way. This is not a value added tax.

Fourth, the ultimate seller essentially pays a tax on multiple taxes, as well as a tax on the goods or services being transferred.

Fifth, the Blago proposed services tax is 1.8 %, not 1%, as was reported at the time we taped our show with Rep. Hamos.

Sixth, we discussed, on tonight’s show, the impact of the Gross Receipts Tax on law firms in Illinois. Because much of the impact on law firms will be similar to other corporations or partnerships, we will stick with that example for this analysis. Five of the top one hundred gross revenue firms listed in the May, 2006 American Lawyer are based in Illinois, all in Chicago-- but with additional offices around the country. The top revenue generator is Kirkland & Ellis at almost a billion dollars, as of the 2006 report, and certainly over a billion as of the upcoming May, 2007 report. Will K&E pay Illinois 18 million dollars in the form of a gross receipts tax, or will K&E only pay taxes on the services performed for Illinois headquartered clients, or for services performed by attorneys located in its Illinois offices, or what?

Seventh, if an Illinois based law firm is competing in a national market, can it expect to “pass-on,” most or even much of the cost of its new tax to clients, as suggested by State Rep. Hamos? Probably not--unless the tax is structured so that the great majority of law firms not based in Illinois are taxed by Blago’s tax, as well, and to the same extent as the Illinois based firms. And that’s not likely because the Gross Receipts Tax is not that gross.

Eighth, if an Illinois based law firm is competing in a Illinois [or more localized] market, can it expect to pass on most or even much of the cost of Blagojevich’s Gross Receipts Tax to clients, as suggested by State Rep. Hamos? Some of that tax can be passed on, but almost surely not completely-- as was suggested by State Rep. Julie Hamos. Some of the cost will be born by the partners [or shareholders], some by the clients and some by the employees [associates and non-professional staff]. It all depends on the elasticities of supply and demand. Remember-- corporations or partnerships don’t pay taxes, people do. Corporations and partnerships simply collect them. And, the cost is borne in part by the shareholders or partners, in part by the employees and in part by the clients.

Ninth, Watch the show tonight with Rep. Hamos. It’s a good one. We saved most of the Econ 101 for the blog. Even Berkowitz can’t make the “dismal science,” interesting enough for prime time. ************************************************ State Rep. Julie Hamos [D-Evanston]: …in out sales tax, we have a very narrow base…the gross receipts tax would expand that. Everybody would pay a little and what I think is good for [the] consumer, again I haven’t heard the details, just leaks so far, is that I think a portion of the sales tax would be reduced—the state portion, so … right now if we pay 9% sales tax, we would pay 3% or 3.5 %, but these other small taxes might add to the overall cost.

Jeff Berkowitz: Well, of that 9% that we pay now, how much is the state portion?

State Rep. Julie Hamos: I believe it is 6.5%.

Jeff Berkowitz: And, you are saying basically the Governor is going to propose taking out the state tax portion of the sales tax?

Julie Hamos: Again, we don’t have the details, but that’s the early version of this. Yes. It is going to be a benefit for consumers, a benefit for businesses who pay that and consumers who have to pay that. But, then there would be this very small 1% of everyone’s receipts—would go into a fund and that generates a lot of dollars.

Jeff Berkowitz: It does. You know if you are a law firm with revenues of 100 million dollars and we have a few of those around town—

Julie Hamos: Do we?

Jeff Berkowitz: More than a few. [at least a dozen].

Julie Hamos: A hundred million?

Jeff Berkowitz: A hundred million dollars

Julie Hamos: So they would pay a million dollars. Okay.

Jeff Berkowitz: That’s a lot of bread.

Julie Hamos: Well, you know what, if they are now charging $300/hour, they might charge their clients $303. One percent [more]. [At the time, it was thought that services would be taxed at 1% under Blagojevich's proposed GRT; it turns out that he proposed 1.8%].

Jeff Berkowitz: Yeah, but they are already raising their rates [or trying to, with many large law firms raising annual salaries for first year associates from $135, 000 to $145,000]. So, now they are going to have to try to raise them more.

Julie Hamos: Well, they might charge $303/hour and blame it on this. But, it’s really one percent, that’s all it is.

Jeff Berkowitz: And the doctors, they’re also going to have to pay this tax?

Julie Hamos: Again, I don’t know the full details.

Jeff Berkowitz: But, you would expect that. That [medical care] is a service.

Julie Hamos: I think so.

Jeff Berkowitz: And, you get your car repaired, that’s a service.

State Rep. Julie Hamos: And, again, I think almost every state has a broader sales tax than we do and they do put taxes on some services, not all. So, I don’t know if doctors are included. Healthcare is included. I just don’t know how it all fits.

Jeff Berkowitz: But, if all those things were included that I mentioned, that you just mentioned, does this sound like something you would support?